Is FinTech the answer to a more sustainable planet?

July 14, 2021 09:08
Image: Reuters

Environmental, social and governance (ESG) investments have surged in Asia-Pacific over the last year – 57% of investors in the region expect to have “completely” or “to a large extent” incorporated ESG issues into their investment analysis and decision-making processes by the end of 2021, according to a MSCI 2021 Global Institutional Investor survey. Sustainable investing has hit an all-time high as investors, stakeholders, businesses and consumers alike place greater emphasis on our impact on the planet.

Several Asian financial institutions have formalised their commitment to align their businesses with the goals of the Paris Climate Agreement. However, sustained action from the global to the local level is expected to cost USD 5-7 trillion annually, and investors in sustainable development, such as banks and other financial services, will need to scale up their analytics platforms to better understand the operating, financial and sustainability performance of their assets.

How will this be achieved?

Enter FinTech in the shape of four technology families: the Internet of things (IoT), big data, artificial intelligence (AI) and blockchain! These technologies are already being used across industries in the region to drive sustainability and move communities towards carbon neutrality. They have the power to provide information, context, data, and the tools to build a more sustainable and equitable world, for example through building economic capital alongside social and economic inclusion, protecting natural and human environments across vast areas of the globe, or building smart cities that could conserve valuable non-renewable resources.

For example, the flow of data streams from multiple sources, such as IoT results in enormous digital databases: also referred to as ‘big data’. Big data is a goldmine for enterprises engaged in managing and monetising important business in banking, healthcare and ecologically significant projects. FinTech is designed to use relevant data from these sources to make better decisions, especially when financial investments with global scale impact are being considered. Cases in point are the Belt and Road Project and the Arctic Drilling Project.

So far, the main objective of FinTech has been to improve financial inclusion, but it is also possible to mine the power of FinTech, for example to manage climate risk and ameliorate the problem of climate and economic refugees through responsible project and infrastructure financing. Blockchain applications can include strengthening financial autonomy for women or providing funding for distributed solar technology through crowdsourcing, thereby cutting the use of non-renewable resources like fossil fuels. The possibilities that FinTech presents to drive a more sustainable future are seemingly endless.

The role of regulation and compliance

It’s not just businesses looking to make better and more sustainable decision making. Consumers are also beginning to think in terms of a ‘climate neutral relationship’ with the planet – and they are loyal to the brands that respect that relationship. With the convergence of technologies, regulatory and compliance teams will have to reconfigure how they view the development of standards to benefit both local and global sustainable development. By making the gathering, usage and movement of data faster, cheaper and more reliable, FinTech provides the key for more responsible decision making.

The conversion of information into insight enables industry leaders and regulators to have a readily available platform to make decisions that benefit the planet as well as the bottom line. This has already been demonstrated in numerous global initiatives – Blockchain is used by environmental protection agencies to support sustainable food supply chains, and the European Space Agency’s Copernicus platform uses public satellite data to track environmental threats, for example.

Finding a balance

There are several potential downsides to FinTech. If financial decisions are made from purely automated data production and analytical capability, outliers such as poorer or higher risk borrowers may be excluded. Until now, global standards development has focused more on financial inclusion and consumer protection rather than how to regulate to avoid systematic exclusion of assets that fall outside of the normal.

Secondly, digitalisation increases transparency of financial decisions. By facilitating democratised usage, it may open up new and previously untapped avenues for illicit financial flows, expose customer data, increase systemic risk or create moral hazards through peer-to-peer lending. Policies, regulations and standards are just beginning to correlate these risks and tackle this problem.

However, while FinTech regulation is clearly needed on both a local and global scale, it needs to be balanced against the risk that too much regulation may inhibit consumer friendly innovation. FinTech has a great opportunity to be at the vanguard of transforming financial services from being purely focused on shareholder value, towards taking greater responsibility for global stakeholder value.

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Chief Executive Officer, Asia Pacific and the Middle East, of International Compliance Association